(Cost of secured short-term credit) The Marlow Sales and Distribution Co. needs
ID: 2809531 • Letter: #
Question
(Cost of secured short-term credit) The Marlow Sales and Distribution Co. needs $520,000 for the 3-month period ending September 30, 2015. The firm has explored two possible sources of credit. a. Marlow has arranged with its bank for a $520,000 loan secured by its accounts receivable. The bank has agreed to advance Marlow 75 percent of the value of its pledged receivables at a rate of 12 percent plus a 1 percent fee based on all receivables pledged. Marlow's receivables average a total of $1 million year-round b. An insurance company has agreed to lend the $520,000 at a rate of 10 percent per annum, using a loan secured by Marlow's inventory of salad oil. A field-warehouse agreement would be used, which would cost Marlow $2,000 a month. Which source of credit should Marlow select? Explain. Note: Assume a 30-day month and 360-day year. The cost or APR of the pledging accounts receivable is % Round to two decimal places. The cost, or APR of the loan secured by inventory is % (Round to two decimal places.Explanation / Answer
Soln : Marlow's receivables on an average in a year = $ 1 million per year
He needs the loan for 3 months against these receivables, So, receivables round the year = $1million
Now, Total loan that can be given by bank = 75% of 1 million = $750000
12% on this loan will cost an amount of = 12%*750000 = $90000
Fee processing is to be done everytime loan disbursed = 1% is required every 3 months on value of 520000 , net amount paid as fee for an year = 520000*1%*12/3 = $20800
Total amount paid by company against loan = 20800+90000 = $110800
Rate of interest APR = 110800/750000 = 14.77%
Option b : Company got a loan at 10% i.e. total amount paid as interest = 10%*520000*1 = $52000
Plus 2000 per month i.e. 2000*12 = $24000 more to be paid as rent
Total cost for this loan to the company = 24000+52000 = 76000
APR in this case = 76000/520000 = 14.62% (approx.) per annum
We can see here that option b seems to be less comapre to option a and hence it is better to get loan from insurance company.
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